Is it your perfect pitch deck? Or is it your business model? Or, could it be your amazing product? When it comes to making a startup irresistible and setting your heart on approaching potential investors, there’s only one answer: all three!
Sounds daunting doesn’t it? Well, it can be. Try to put yourself in the shoes of those you are attempting to raise funds from. Wouldn’t you want to see an impressive yet simple presentation? And projections of sales, revenue and growth which look like a hockey-stick graph? And finally, a sound business model to support it? Of course you would.
Of course, some of these things have different levels of importance, depending on the type of investor you are approaching. For example we, at Starttech Ventures, place more value on business model over product; every time. So, how do you know what you need to focus on?
The most important thing for a contemporary entrepreneur when approaching potential investors is not your pitch deck. It’s having a clear strategy, and doing your homework. Sounds easy, right? Well, it’s harder than it seems. But, thankfully, we’re here to provide some choice tips. Sit back, and let us take you through the key points you need to bear in mind.
Approaching potential investors: negotiating the minefield
First and foremost – and this may not surprise you – preparation is everything. Far too often, startups fall into the trap of thinking that their product and idea alone, as well as the enthusiasm, dedication and obsession that the founders have about it, is enough. Newsflash: it is not.
In terms of a brief summary of what you need to do before approaching potential investors, these are the main aspects you need to focus on:
Due diligence
This is something that is often rushed or not given the importance it deserves. And you need to make sure you are on point. Because rest assured, investors – no matter if they are seed, angel, early stage, or VC’s – will perform thorough due diligence on you and your startup.
The concept is traditionally associated with financial terms, but in reality it is a comprehensive examination and evaluation of all your data. We’re talking about data related to your product and your business model, to your team and background. Why? To make sure that your startup is worth the money, as well as the effort. Keep in mind that when approaching potential investors, they may even perform an in-depth research regarding your financial records.
Risk mitigation
If you asked any angel investor, risk mitigation is probably the most important selection criterion. So you need to be on the same page on that point. There are many strategies investors use to achieve risk mitigation. How do they do it? Simple. They will stringently evaluate your business model, weigh up your sales channels, your pricing strategy, etc. So, when approaching potential investors, the main thing you need to do is have a compelling story. It should serve to convince them about how low the risk is if they put their money into your enterprise.
Pre-revenue business evaluation
One of the major factors is this: any investor worth his or her seat will put a heavy emphasis on the strength of the management team. And also at the stage of the business. Investors really hone in on the history of the startup, up to the point when they have come to pitch for funding. They want to see how well you have used the little or limited funds you have had at your disposal, in the early stages. This is where “pre-money” evaluation comes into play, as well as the projected “post-money” valuation of your startup.
Questions to ask yourself [and answer] before you apply for funding
What is your strategy? You have to make sure that you clarify the following questions before you consider approaching potential investors. Rest assured, these will be the ones your Investors will be asking you.
This article on Crunchbase from a prominent VC representative highlights 7 key questions, which we’ve paraphrased below:
1. Is your team well-balanced, dedicated, and focused on the problem you are solving?
Here, the investors are looking to understand not just how passionate you and your team are, but if you have the talent, skills and resources to follow through. If they spot any big gaps in your story, you could be in trouble and have plenty of explaining to do.
2. How well do you know your business, market, competitors, and industry?
A question designed to see if you really do have all your ducks in a row. Investors want to see how much research and due diligence you have put in, and make sure that you don’t have tunnel vision – in that you’re only focused on what you’re doing without taking into account your surroundings.
3. What’s your valuation and is it in-line with the industry and the region?
This one is kind of self-explanatory. Don’t try to inflate your value or worth in relation to where you are compared to the market you’re aiming for.
4. Why are you solving this specific problem your business aims to solve?
Here is where you get to do that impressive pitch about your “Why(s)”. Hopefully, you will have more than one of them. But all of them should support the master reason.
5. Are you optimizing well enough in terms of budget?
The aim with this question is to evaluate how “good” you and your team have been so far with money. That goes to say, your “money machine” works, meaning you have learned how to turn one dollar invested into two dollars of profit, or more. Here, you will get extra points if you show that you’ve got some skin in the game, how well you have been bootstrapping your business, and how you are masters of the lost art of capital efficiency.
6. Is your company a good fit for the specific VC fund you are approaching? (Their own track record, what they have invested in, in the past)
No need to explain this one. If you have a consumer-focused product for example, you wouldn’t go to an investor focused on B2B SaaS products. Or would you? The answer is no!
7. Do you have an “unfair advantage” over your competition? This could be technology-related or human resource related, for example.
You should see this more than just a gimmick. Sadly, many startups try and use this as a marketing ploy, but you can only do that if you have a genuine differentiation factor.
Choose your investors, or investor targets, wisely
This may sound strange, because you may initially think that you should be happy – and grateful – if any investor wants to pump money into your startup. But you would be wrong to think of it this way. So don’t fall into that trap. Remember, you have a choice. Yes, believe it or not, you do. And you need to make sure you make the right decision.
Contrary to popular belief, funding is not the be all and end all for your startup. Most early-stage startups don’t always need financing. In fact, early financing can actually work against your strategy and productivity. In many cases, it acts like steroids. It’s far better to focus on capital efficiency and product development efficiency – concepts that may be alien to some, especially in Silicon Valley – and make every dollar count. We’re not saying you have to do things on a shoestring, but you have to think Lean.
Scaling without funding?
Many startups manage to grow and scale up impressively without funding. We even have a few examples of such companies within our own portfolio, here at Starttech.
One of them is Epignosis, which is, by all accounts, a true scale up success story. In the early days, we were hesitant about approaching investors for funding. And then, when we did, we were rejected, mainly because the idea didn’t seem “big enough”, or was not “disruptive” enough. What they failed to understand is that we define disruption a little differently. And so the company went down the road of capital efficiency, growing organically without a wad of cash from VC investors. What happened next? Investors began to come knocking on our door because the company was profitable.
But there are other good examples, in Greece alone. Examples such as Skroutz, the online retail platform, which has known unprecedented success. The moral of the story is this: If we’ve said it once, we’ll say it again, many early stage startups don’t always need venture capital financing.
Venture capital is definitely not a requirement in your early stages. And if you’re dazzled by fake valuations that make for unicorn illusions, just to make numbers look right, try not to be. It’s a roller coaster ride you’d likely not want to be on.
What’s most important for you, now, is that you measure your responses. You should opt for the right action at the right time – that’s as Lean as it would get. Consider your business model as compared to your product. In order for you to run a viable business, you need a viable business model and a repeatable sales cycle. Unit economics play a huge role in such viability. All in all, you might have better luck with a business model (and product) that is useful rather than impressive. Think about it for a moment.
Does the investor type play any role?
Yes, it does. For example, there are passive investors and active investors. Which type you go for, can heavily impact your startup in your decisions. For example, at Starttech we classify as active early-stage investors.
Apart from funding, we also get deeply involved with our portfolio companies, through our Venture Building team. How? By offering them an unrivaled set of additional services. From Working space and UX /UI design expertise to growth marketing and content marketing, as well as essential “invisible” services, such as financial and IT administration, HR and legal support. We call that a “noise-free” environment for young startups.
Yes, on one side active investors are more involved in the day-to-day side. On the other side, as much as this helps in providing focus, it can also create friction. But it’s a small price to pay, compared to how you’d work with a passive investor. While passive investors may give you the freedom to “get on with it”, they expect you to hit the targets they set each month and every quarter. And if you don’t, you’ll have some serious explaining to do, if not just plainly lose your funding.
Last but not least, don’t be afraid to ask questions when approaching potential investors. You’re not going begging. You want to show that you mean business and are carefully considering who is essentially going to become your future business partner. And, if we had to nail down the one question entrepreneurs need to ask their prospective venture capital investors, it would be this: “What’s your capital loss ratio?” Why, you ask? Easy. The answer will tell you everything you need to know. Read more about that here, as well.
What investors really want
We’ve written a loaf of useful advice on this topic and, being investors ourselves, all of it comes from our own experience. But there is always one thing that shines through, when considering what most investors really want. And one of the best-known celebrity investors, Ashton Kutcher, sums it up best for us:
When I meet with a founder with true charisma, I usually come away feeling like I want to quit my job and go work for them. Because if I don’t get that sense or that feeling that I want to quit everything that I’m doing to go work for them, the best person for the job that they are hiring for isn’t going to have that feeling either.
Ashton Kutcher
Hear, hear Ashton!
So, whatever happens with your fundraising journey, approaching potential investors will always give you valuable feedback on your ideas. We’ve got some valuable ones for you from Greek-based Metavallon; a venture capital fund, investing in very early stage technology companies in Greece, Europe and the US.
In the end, even if you don’t manage to strike a deal, you’ll get the chance to gain some priceless knowledge from an external observer; one that definitely has much more experience than you. And that’s always a good thing!
